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Choices galoreThe last few budgets have thrown open a variety of investment options to invest to save tax. The most important question is which area of investment to choose. Three most important investments which as far as possible should be taken advantage of by all individual tax payers in particular are:

(a)Investment in a residential house property;

(b)Investment upto a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C / 80CCC;

If you want to achieve the highest score of tax planning with reference to your investments, then one must make it a point to buy one residential house property for self-occupation especially when you do not own a residential property in your name. As per the provisions contained in section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible for every individual in respect of interest on loan for residential self-occupied house property. This interest on loan is allowed as a deduction irrespective of the person from whom you take the loan. Hence, even if you take a loan not from a banker but from a relative or your spouse and make the payment of the interest still then the deduction in respect of interest on loan would be allowed. The maximum amount of deduction as per section 24 in respect of interest on loan for residential house property is Rs 1,50,000 per year.

If you don't have a housing loan, it really makes sense right now to start hunting for housing loan and try to get the occupation of the property before the close of 31st March so as to enjoy the full deduction on account of interest on the housing loan. Please do remember that in case the house is not ready the benefit of deduction will not be available in this year. Your investment in residential house property for self-occupation can also get you another tax deduction in terms of section 80C whereby deduction from your income upto Rs 1 lakh is permissible even in respect of repayment of the housing loan to bank, financial institution, employer etc. Those interested should refer to the exact provisions of section 80C.

Now, it is time to judge your preference for making investment in various vistas available as per section 80C of the Income Tax Act, 1961. However, please do remember that one or more items taken together the total investment amount should be a maximum of Rs 1 lakh to entitle you to a deduction u/s 80C. One can also opt for contribution to the Pension Plan whereby deduction u/s 80CCC is permissible upto Rs 1 lakh. However, the combined deduction of section 80C and section 80CCC for Pension Plan is Rs 1 lakh only. Hence, it implies that there is no separate specific deduction for pension plan contribution. ( Don't you want tax breaks? Click here to find out how? )

Now coming to the most important area of tax deduction by making investment in tune with the provisions contained in section 80C of the Income Tax Act, 1961, we find that the comparatively popular areas in which investment can be made by the tax payers are payment of life insurance premium, contribution to public provident fund, investment in NSC, investment in NSS (National Saving Scheme), payment of the children tuition fee, investment in ELSS and repayment of the housing loan. Thus, all together one can pick and choose from all these investment options as also the pension plan and thereby target the total investment to the figure of Rs 1 lakh, which happens to be the maximum amount which one can contribute by way of investment for tax benefit.

Another happy news of making investment for the purposes of section 80C is investment in bank fixed deposit of any scheduled bank having a maturity period of minimum five years. Thus, your investment in bank fixed deposit during the current year for five years or more will entitle you to tax deduction in terms of section 80C of the Income Tax Act, 1961.

How to choose the best investment?Now let us try to analyse which investment is good for which category of tax payer. It is a well-known fact that the tax payers can be classified into different categories depending upon the tax bracket in which they are assessed. For example, the first category of tax payers would be persons having income in excess of Rs 1 lakh but upto Rs 1,50,000. All those tax payers coming into this category are required to pay income tax of just 10%. I would like to recommend this group to make investment especially in insurance, NSC, NSS and bank fixed deposit.

Now comes the next category of those tax payers who are having annual income exceeding Rs 1,50,000 per annum and going upto Rs 2,50,000 per annum. All those tax payers coming in this bracket are required to pay income-tax at 20%. The best module of investment for this category of tax payers would be insurance, payment of tuition fees of the children, ELSS, repayment of housing loan and PPF. Now comes the last category of tax payers who come within the income bracket of more than Rs 2,50,000 where the maximum marginal rate of income tax is 30%. This category of individual tax payers should invest in insurance, PPF, ELSS and repayment of the housing loan. ( Did you know that you can get faster refunds for income tax returns filed at post offices? )

However, the investment in various investment instruments can vary from person to person depending upon his profile of investment and his liking or otherwise. However, purely from the point of view of tax and investment planning it makes no sense to invest in bank fixed deposit especially by those tax payers who are having high income and high rate of income tax. This conclusion is drawn from the fact that if a person having, say, income in excess of Rs 2,50,000 makes investment in the bank fixed deposit for five years to achieve the benefit of section 80C deduction, he enjoys tax deduction but on his income from bank fixed deposit he will be required to make payment of income tax at the rate of 30%. Hence, we would like to recommend investment in bank fixed deposit as a part of investment strategy to achieve tax deduction u/s 80C only for those tax payers who are coming within the lowest income bracket.

No higher deduction is available for investment in tax saving instruments for senior citizens or for women tax payers. However, the senior citizens can invest in medical insurance upto Rs 15,000. Sometimes, a question also arises whether the investment in other bonds and investible instruments would entitle the tax payer to section 80C. For example, your investment in post office monthly deposit account or your investment in senior citizens saving scheme as well as your investment in RBI (reserve Bank of India) bond will not bring home for you any tax saving in terms of section 80C.

In conclusion, please do remember that you have a long time ahead waiting for you upto 31st March, 2007 to make your investment in tax saving instruments but surely it makes better sense to invest now, relax and save tax right now. You can also opt for making the investment not at one go but in installments. Yes, if you have some small money available right now you may better invest now the money in tax saving instrument and as and when you have balance money available at your disposal then make investment at a later date but surely before 31st March, 2007.

The author, Subhash Lakhotia, is Tax and Investment Consultant in New Delhi for the last over 35 years. He may be reached at slakhotia@satyam.net.in